Updated: Jan 6
When people generally think of economics they think of the economy, GDP, stock prices, money, and a bunch of other stuff. But when it comes down to it, economics is the study of people, and choices. Today we are going to be discussing economics. Although economics seems like a very complicated topic, when broken down, it really is just a way to help us make decisions. And all the jargon and complicated charts are just ways to explain all of the intricate theories that come with it. Learning about economics will not only help you make money and understand the economy, but will also help you understand the hundreds of decisions you make every day.
Every second of the day you are using economics. You made a choice to do whatever you are doing at any given moment. This means that you believe whatever you are doing is more valuable than all the other things you could do. Or you believe that the benefits of whatever you are doing outweigh the costs.
No matter what you are doing there is always a cost. The cost is everything else you are not doing. And if you didn’t enjoy the choice you made, the cost was the time you spent doing it. The economic term for this loss is called the opportunity cost. Right now the opportunity cost for you is everything you are not doing by reading this article.
Two of the most important assumptions that make up economics are these:
People have unlimited wants
We don’t have unlimited resources
People use economics to get the most out of our limited resources. There would not be any economics if there were unlimited resources because then we wouldn’t have to make choices. With scarcity, we must make a choice.
The government uses economics to decide which choices to make. But not every question that the government has will be answered correctly with economics. By weighing the costs and the benefits and the impact every choice will make, the government can try to make somewhat foolproof conclusions and decisions. This is very helpful when it comes to keeping an entire country stable.
Economists try to understand the different incentives. Incentives are things that encourage people to do certain things. But, sometimes trying to think about the best incentive can be hard. But once you get the incentives right, you could potentially have great effects! But if you get the incentives wrong, the policy won’t work.
There are two generalizations of economics. First is macroeconomics which looks at the big picture and studies the economy as a whole. This helps us try to predict big things like GDP and unemployment based on different decisions being made. Second is microeconomics that looks at all the individual businesses and aspects of the economy. It also looks at all the details that could potentially have big effects.
Economics will help you out a lot when it comes to decisions. And you don’t even have to be an economist to apply economics to your life decisions. This is why economics is so important!
Specialization of Labor
We have limited resources, so we need to be able to analyze the most effective way to use them. During the Industrial Revolution, we started to see people’s lives start to improve drastically. We started to live life without the constant fear of dying. Isn’t that nice!
We believe today that it was the division of labor that made countries wealthy. Especially because this leads to assembly lines. In an assembly line, you get to specialize in a certain field and people are able to do their job quicker and more effectively.
Specializing in something also goes beyond assembly lines. Think about one cheeseburger. In order for that cheeseburger to be made, a lot of steps would have to be done. You would have to grow wheat to make bread. Raise a cow for the meat and the milk to make cheese. And you would have to grow tomatoes and lettuce. Then after all of that, you would have to build yourself all the supplies needed in order to cook the cheeseburger. And after all that tiring work, you would have yourself a nice, homemade cheeseburger!
But when we have a specialization, we can have separate people do all the different steps for us, and all we have to do is buy the cheeseburger already made for us!
The modern era that we live in today has taken specialization to the extreme. Anyone who is a farmer is most likely only a farmer. And anyone who is an accountant is most likely only an accountant.
But even though we have benefited dramatically because of specialization. We wouldn’t be able to boost our economy and to use the best out of our resources as well as we have today without trade. This allows countries to specialize and trade with each other.
Here is a chart that illustrates why trade is so beneficial. It is called the Production Possibilities Frontier.
This chart illustrates the number of shoes and planes the United States and China can produce using their resources. You may think that this chart would not be beneficial because we don’t live in a world of only shoes and planes, but once you understand the tradeoffs between two goods, your knowledge can reach any number and variation of goods.
If you produce a number of goods on the Production Possibilities Frontier, that means you are being efficient with your resources. If the amount of goods that you produce is inside the Production Possibilities Frontier then you are using your resources inefficiently. Outside the Production Possibilities, Frontier is impossible.
As you can see from the chart, the United States is better at producing planes than shoes. But the US also loses less when making planes. This means that the United States has a comparative advantage when it comes to planes. China, on the other hand, is better at producing shoes than planes. So China has a comparative advantage when it comes to shoes.
If both China and the US do what they are best at and trade, they will get more out of their investment than if they didn’t trade. This makes the trade mutually beneficial. So, as you can see, trade is a very important part of our world so that if you specialize in something, you’ll be able to have other things too.
When you have different countries focus on different things, or specialize. Then they will also probably feel obliged to trade as well. Different countries around the world use the Production Possibilities Frontier to calculate whether their trade is mutually beneficial, in their favor, or in the other countries’ favor.
This chart can help show the importance of economics too! Without this Production Possibilities Frontier chart, how would countries know if their trade was the right decision? How would they be able to calculate their benefits and losses?
Even though economists disagree on many things, one thing is clear to all of us. Specialization and trade make the world better off and help us use our limited resources efficiently!
From deciding whether to eat Cheerios or Frosted Flakes to making big financial decisions, economics can play a big role in your life. How can you apply economics in your life?
Disclaimer: This article was written based off of the Crash Course Economics playlist on YouTube which I would highly recommend if you would like to learn more.